ExamFX - Chapter I - General Insurance

What are the five characteristics of an ideally insurable risk?

1) Due to chance; 2) Definite and measurable; 3) Statistically predictable; 4) Not catastrophic; and 5) Randomly selected

What is a aleatory contract?

A contract in which the participating parties agree to exchange unequal amounts.

Fraternal Benefit Society

A life or health insurance company formed to provide insurance for members of an affiliated lodge, religious, or fraternal organization with a representative form of government.

What is avoidance?

A method of dealing with risk by deliberately keeping away from it

What is Retention

A method of dealing with risk by intentionally or unintentionally keeping a portion of it for the insured's account; the amount of responsibility assumed but not reinsured by the insurance company.

What is consideration on the part of the insurer?

A promise to pay in the event of a loss

What does the term unilateral contract mean?

A unilateral contract is a one-sided contract. This means only one party makes an enforceable promise

According to the Law of Agency, who represents the principal?

Agent or producer

What are the four elements of an insurance contract?

Agreement (offer and acceptance), consideration, competent parties, and legal purpose

What is a warranty in an insurance contract?

An absolutely true statement upon which the validity of the policy depends

What is a contract?

An agreement between two or more parties enforceable by law.

What is morale hazard?

An indifference to loss

What is a foreign insurer?

An insurer with a home office in another state

If an insurer holds a Certificate of Authority, it is known as what type of insurer?

Authorized or admitted

What are the methods of managing risk?

Avoidance, transfer, sharing, retention, and reduction

What does the term reasonable expectations mean in insurance?

Certain expectations for coverage that a reasonable person would have based on sources other than just the policy language

What document is required for an insurance company to transact insurance?

Certificate of Authority

What is consideration in an insurance contract?

Consideration is something of value that each party gives to the other. Consideration on the part of the insurer is binding.

The loss ratio compares?

Earned premium to losses

Compared with other drivers in his age group, a driver has had more minor accidents and traffic violations. Which rating types would accurately reflect the driver's true insurance risk?

Experience

The trust that a client places in the producer in regard to handling premiums is an example of a producers?

Fiduciary duty

The requirement that agents not commingle insurance monies with their own funds is known as?

Fiduciary responsibility

What type of insurer is formed under laws of another state

Foreign

Insurers are classified according to their domicile. What are the three types of insurers?

Foreign, Domestic, Alien

Conditions that increase the chance of a loss are known as what?

Hazards Hazards are any factors that increase the likelihood that a loss may occur.

What are three types of agent authority?

Implied, Express, and Apparent.

Courts will interpret any ambiguity in an insurance contract

In favor of the insured

What provision states that if a policy allows for grater benefits than the financial loss incurred, the insured may be compensated only for the amount lost?

Indemnity

What do individuals use to transfer risk of loss to a larger group?

Insurance

What is reduction?

Lessening the possibility or severity of a loss

Rates that are established based on the similarities of the risk with other risks are known as

Manual rates

A tornado that destroys a property would be an example of what?

Peril

What is the term for the causes of loss insured against in an insurance policy?

Peril

What are the three types of hazards?

Physical, Moral, Morale

A situation in which a person can experience only a loss and no gain presents what type of risk?

Pure Risk

What are Manual rates?

Rates that are established by similarity of risk are manual rating or class rates.

If a court ordered payment for a loss that was not covered in the policy even if it was clearly worded, it would be an example of which legal concept?

Reasonable expectations

What method do insurers use to protect themselves against catastrophic losses?

Reinsurance

Wagering on a sporting event is known as what type of risk?

Speculative risk

Apparent Authority

The appearance or the assumption of authority based on the actions, words, or deeds of the principal or because of circumstances the principal created.

Peril

The cause of a loss (Fire)

What is a peril?

The cause of possible loss (fire, windstorm, explosions, accidents etc.)

What is the purpose of an experience rating

The insured's past experience helps determine the premium.

What is a certificate of authority?

The license required for an insurer to conduct business in the state

What does loss ratio compare?

The premium incomes to losses, including claims paid and claim-related expenses.

What does indemnify mean in insurance?

To restore an insured to the same financial status as before a loss

What is a risk?

Uncertainty of loss

The process an insurer uses to evaluate applications and determine if a policy should be issued and on what terms, conditions, and rates is known as?

Underwriting

Insurance contracts are aleatory in nature. What does that mean?

Unequal values are exchanged between the parties to a contract

An insurance company receives an application with some information missing and issues the policy anyways. What is this called?

Waiver

When would a misrepresentation on an insurance application be considered fraud?

When it is intentional and material

In insurance contracts, when is the offer usually made?

When the insurance application is submitted

In insurance contracts, when does acceptance usually occur?

When the insurer approves a prepaid application

What is a physical hazard?

a physical condition

What is moral hazard?

a tendency toward increased risk

What type of authority is based on the agent's actions, or words?

apparent

The risk management technique that is used to prevent a specific loss by not exposing oneself to that activity is called

avoidance

The authority granted to an agent through the agent;s contract is referred to as?

express authority

What are components?

factors that determine rates, including loss reserves, loss adjusting expenses, operating expenses and profits.

Which of the following entities is not an insurer but an organization formed to provide insurance benefits for members of an affiliated lodge or religious organization?

fraternal benefit society

In the agent/insurer relationship, who is considered the principal?

insurer

Using an air-cooled engine, a proposed insured has developed a new, experimental aircraft. If the inventor applies for liability insurance, what rating type will the insurer most likely use?

judgment

For the reported losses of an insured group to become more likely to equal the statistical probability of loss for that particular class, the insured group must become

larger

What is sharing?

method of dealing with risk for a group of individual persons or businesses with the same or similar exposure to loss to share the losses that occur within that group

What is the major difference between a stock company and a mutual company?

ownership

Installing deadbolt locks on the doors of a home is an example of which method of handling risk?

reduction

What does aleatory mean?

values exchanged are not equal but depend on an uncertain event